Devaluation is an official decision by a government to lower the value of its currency against other currencies. This only happens in countries that use a fixed exchange rate system, where the government controls the currency’s value instead of letting the market decide.

When it occurs:

• The country’s currency is considered too expensive, leading to trade problems like current account deficits.
• The government officially sets a new, lower price for its currency.
• The government must have enough foreign exchange reserves to keep the new, lower rate stable.

Economic effects:

• Exports become cheaper for people in other countries, which usually helps sell more goods abroad.
• Imports become more expensive for people living in the country, which usually reduces the amount of foreign goods bought.
• The balance of trade typically improves, which helps economic growth.
• It can be inflationary because goods bought from other countries now cost more, making general prices rise at home.

Key distinction: Depreciation happens naturally based on supply and demand in a floating market, while devaluation is a forced change made by the government.